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August 17, 2022 – The Court hearing the GenapSys case issued an order: (i) approving bidding procedures in respect of the sale of substantially all the Debtor's assets, (ii) authorizing the Debtor to select one or more stalking horses (and offer bidder protections* to any selected stalking horse) and (iii) adopting an auction/sale timetable culminating in a September 1st auction and a September 7th sale.
*Comprised of (i) a break-up fee (not more than 3% of Qualified Bid) and (ii) expense reimbursement up to $750k (collectively, the “Bid Protections”).
The order does not specifically reference the Debtor's August 12th motion requesting authority to enter into stalking horse arrangements with Sequencing Health, Inc.** (the “Buyer” or “Stalking Horse,” $10.0mn cash bid, although Debtors value total consideration at $42.0mn) [Docket No. 149, which attaches the Buyer’s asset purchase agreement (the “APA”) (described below) at Exhibit B].
A hearing on that stalking horse motion is now scheduled for September 22nd.
* The APA is signed on behalf of the Buyer by Philip Freffus of Farallon Capital Management, L.L.C.
On July 11th GenapSys, Inc. ("GenapSys" or the “Debtor”) filed for Chapter 11 protection noting estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $10.0mn and $50.0mn. At filing, the Debtor, “a Redwood City, CA based genomic sequencing company,” noted that "the Debtor’s business was not able to withstand the liquidity, operational and reputational impacts of prepetition litigation" (see "Events Leading…" below for background on litigation).
On August 16th, the Court rejected a motion filed by company founder Hesaam Esfandyarpour to dismiss the case based on arguments that the Debtor did not have proper authority to file for bankruptcy and that the Debtor's then Board had not been properly constituted. In rejecting those arguments (and allowing the Debtor's bankruptcy case to proceed), Judge Brendan Shannon held that any filing defects had subsequently been cured, commenting that dismissal could increase the future prospect of "considerable mischief" and that "if the drastic remedy of dismissal is available, I have every confidence that parties will try to explore these issues in hopes of gaining leverage in the bankruptcy or, frankly, distracting the Debtor and the Court right out of the gate in a chapter 11 reorganization."
On August 4th, Judge Brendan Shannon delayed consideration of the debtors' bidding procedures motion, saying that he didn't want to issue a final ruling on financing or the Debtors' sale process until an August 15th hearing "on the founders' request to dismiss the bankruptcy or have an independent trustee oversee the company." With that hearing now held; the dismissal motion rejected; and the Debtor's suddenly presented with a stalking horse, prospects for a reinvigorated sale process are dramatically increased, albeit with the sale process now delayed by approximately three weeks (as reflected in amended DIP milestones, see our separate DIP financing coverage).
Farallon Stalking Horse Role
The Lazard Declaration [Docket No. 150] clarifies in respect of Stalking Horse identity and consideration: "continued negotiations with Farallon resulted in the Debtor receiving a stalking horse bid for substantially all of the Debtor’s assets from the Stalking Horse Bidder, a purchaser entity anticipated to be affiliated with entities, funds and/or accounts managed or advised, directly or indirectly, by, or under common control with, three investors holding Series D preferred equity interests in the Debtor: Farallon, Soleus Private Equity Fund II, LP ('Soleus'), and PBM Gen Holdings, LLC ('PBM'). Pursuant to the Stalking Horse Bid, the Stalking Horse Bidder is purchasing the Purchased Assets for the aggregate purchase price of up to $10,000,000 in cash consideration and the assumption of certain prepetition indebtedness to Oxford Finance LLC (collectively, the 'Purchase Price'). The Debtor estimates that the aggregate Purchase Price, based on the Cash Purchase Price and the Assumed Oxford Indebtedness[*], to be approximately $42 million."
* See "Prepetition Indebtedness" below for more on Oxford (also the Debtors' DIP lender) prepetition indebtedness.
Key Terms of the Stalking Horse APA:
- Seller: GenapSys, Inc.
- Buyer: Sequencing Health, Inc., an affiliate of Farallon Capital Management, L.L.C.
- Purchase Price: The Purchase Price is equal to the sum of the Cash Purchase Price plus the Assumed Oxford Indebtedness.
The “Cash Purchase Price” means the dollar amount that is equal to the sum of (i) the total DIP Obligations; (ii) the Cure Amounts; (iii) the Buyer Closing Payments; (iv) the Transferred Employee PTO; (v) the WARN Obligations (if any); and (vi) two million dollars ($2,000,000); provided that the Cash Purchase Price shall in no event exceed ten million dollars ($10,000,000) after accounting for each component of the Cash Purchase Price, including any such component that may be paid shortly following Closing.
The Debtor estimates that the aggregate Purchase Price, based on the Cash Purchase Price and the Assumed Oxford Indebtedness, to be approximately $42,000,000.
- Bidder Protections: (i) an expense reimbursement, in an amount not to exceed $750,000, on account of reasonable and out-of-pocket costs and expenses that may be incurred by Stalking Horse Bidder in connection with the Stalking Horse Agreement (the “Expense Reimbursement”), and (ii) a “break-up” fee in an amount equal to $1,290,000 (the “Break-Up Fee” and, together with the Expense Reimbursement, the “Bid Protections”).
General Asset Sale Background
The bidding procedures motion states, “Given the time constraints imposed by the Milestones and the Debtor’s operational and financial situation, the Debtor, in consultation with its advisors, believes that pursuing the sale of the Debtor’s Assets in the manner described herein, with the opportunity to designate a Stalking Horse Bidder, is the course of action most likely to maximize value and encourage robust bidder participation.
…the Debtor’s business has been thoroughly marketed to a wide range of potential strategic and financial investors and buyers. A substantial amount of information regarding the Debtor’s businesses has been made available to these prospective purchasers during the prepetition phase of the Sale Process. In addition, as set forth in the Bidding Procedures, bidders will have access to additional, updated information about the Debtor’s business that will aid parties in developing thoughtful and competitive bids. As such, the Debtor believes that prospective bidders already know the Assets well and will have sufficient time and information to conduct the necessary due diligence to submit binding bids in accordance with the timeline proposed herein.”
The motion adds, “[t]he Debtor undertook several strategic initiatives aimed at raising additional capital to position the company for continued growth. Unfortunately, despite the promise of its technology and the success of early conversations with investors, the Debtor’s business was not able to withstand the liquidity, operational, and reputational impacts of certain prepetition litigation. Tightening liquidity prompted the Debtor to conduct a comprehensive review of all strategic options, including, among other things, a sale of substantially all of its assets (the ‘Sale Process’). In May 2022, the Debtor engaged Lazard Frères & Co. LLC (‘Lazard’) as its investment banker.
Immediately upon its retention, Lazard spearheaded a marketing process for an investor who would be willing to provide a much-needed capital infusion under the unfortunate circumstances being faced by the Debtor. Lazard solicited interest from over 100 potential financial and strategic investors for financing and investment proposals that would enable the Debtor to execute on its business plan and potentially simplify its capital structure. Nineteen of the parties signed non-disclosure agreements and became involved in the process. By June 13, 2022, Lazard had received only two non-binding indications of interest (one of which was from one or more affiliates of Farallon Capital Management, L.L.C. (together with its affiliates, ‘Farallon’)), each contemplating different transaction structures and terms. However, by late June 2022, Farallon and the Debtor’s prepetition secured creditor, Oxford Finance LLC (‘Oxford’), were unable to reach an agreement, and, accordingly, Farallon’s initial non-binding indication of interest was no longer actionable. Additionally, the other potential investor (‘Party B’) had stopped meaningfully engaging.
With Lazard’s assistance, the Debtor re-engaged Farallon regarding a potential purchase of the Debtor’s assets and potential DIP financing to support the Sale Process. Unfortunately, given the timing and liquidity constraints facing the Debtor, the Debtor, the Prepetition Agent and Farallon were unable to finalize a deal structure before the Petition Date, although the Prepetition Argent and Farallon remained, and are still engaged in, discussions regarding the Sale Process, including with respect to acting as a Stalking Horse Bidder.”
Updated Key Dates:
- Bid Deadline: August 30, 2022
- Sale Objection Deadline: August 30, 2022
- Auction: September 1, 2022
- Supplemental Sale Objection Deadline: September 6, 2022
- Sale Hearing: September 7, 2022
- Sale Closing Date: September 9, 2022
Prior to the Petition Date, GenapSys raised approximately $230.3 million from secured debt and preferred equity to develop its DNA sequencing technology and detection system.
- Secured Claims On December 20, 2019, GenapSys entered into that certain Loan and Security Agreement with Oxford Finance LLC, in its capacity as collateral agent (the “Prepetition Credit Agreement”). Under the Prepetition Credit Agreement, the Prepetition Secured Parties extended a term loan of $30 million (the “Secured Loan”) to GenapSys. The Secured Loan is secured by substantially all of the Debtor’s assets, except as specifically excluded. As of the Petition Date, the approximate principal and capitalized interest outstanding under the Secured Loan is $30 million, which excludes final payment fees of $0.9 million and prepayment fees of 0.5%.
- Unsecured Claims The Debtor’s unsecured creditors are believed to hold claims totaling approximately $4 million in the aggregate. Those creditors include trade claimants, and other routine, ordinary course creditors.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Russell Declaration”), Britton Russell, the Debtor's chief financial officer and treasurer, detailed the events leading to GynapSys’s Chapter 11 filing. The Russell Declaration provides: “Prior to the Petition Date, from late 2021 to early 2022, GenapSys undertook several strategic initiatives aimed at raising additional capital to position the company for continued growth. Unfortunately, despite its proven technology and interest from investors, the Debtor’s business was not able to withstand the liquidity, operational and reputational impacts of prepetition litigation.
As a result of the market downturn, the litigation filed against the Company in 2020, the value-destructive actions taken recently by the Debtor’s founder and former CEO, Dr. Hesaam Esfandyarpour, in two lawsuits filed against the Debtor, the Debtor’s prepetition marketing efforts were severely hampered. GenapSys was forced to furlough nearly its entire workforce to preserve enough liquidity so that it could manage through to the Trial (as defined below) on July 6, 2022, and then ultimately laid off most of its workforce after the Trial to stretch its liquidity to reach the Petition Date."
The Russell Declaration further explains, "In late 2019, Dr. Esfandyarpour conducted a limited launch of a first-generation DNA benchtop sequencer, selling a few dozen instruments and billing customers less than $1 million. In February 2021, the Board asked Dr. Esfandyarpour to step down as CEO and appointed Dr. Jason Myers as CEO. By mid-2021, the Company halted sales and offered refunds to existing customers.
While the underlying semiconductor technology had been externally proven, there were numerous performance issues with the benchtop sequencer due to inherent design flaws. The Company quickly realized that it needed to redesign its DNA sequencing solution to better meet customer requirements, and engaged investment banking firms for assistance in addressing its liquidity needs. The Company sought to raise new equity, primarily to meet its commitments to launch its products and fund associated working capital needs. For example, in late 2021, GenapSys signed a letter of intent with a SPAC, which ultimately fell apart.
By early 2022, efforts to complete the equity raise were unsuccessful. GenapSys began considering other options to address its liquidity needs. Also, by early 2022, GenapSys faced mounting litigation costs associated with the California Action, as well as in connection with certain corporate governance disputes. For one, discovery costs in the California Action were beginning to strain GenapSys’s finances.
About the Debtor
According to the Debtor: “Genapsys is focused on the advancement of universal access to genomic information by delivering an affordable, scalable, and accurate genomic sequencing ecosystem that empowers both academic and clinical research applications. Its system leverages a proprietary electrical microfluidic sequencing chip with a scalable number of detectors, allowing for a wide range of applications. Genapsys is headquartered in Redwood City, CA.”
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